The CFPB and the elephants in the classroom

America’s retail bankers are helping make higher education possible for millions of students. While bank loans perform much better than federal loans, we also know some borrowers can fall behind in their payments due to tough economic times. During these first years out of school, borrowers might not have a job or may be under-employed. In many cases, borrowers need only a little more time to establish themselves and find their first full-time position. That is why the Consumer Bankers Association (CBA) asked federal regulators to recognize student loans are different from other types of credit and to allow banks more repayment flexibility for student loan borrowers, without sacrificing safety and soundness.

CBA suggested in a March letter to bank regulators:

• Permitting banks to offer graduated repayment (including interest-only) during the first three or four years after a loan enters repayment. • Allowing banks more flexibility in offering forbearances — allowing borrowers facing hardship to pause in making loan payments. The length and frequency of forbearance should be tailored on a case-by-case basis to keep borrowers out of default while avoiding excessive increases in the total cost of borrowing.

The Consumer Financial Protection Bureau (CFPB) has focused only on bank lending to date. Private student loans make up 7 percent of the market and consistently perform very well. The CFPB ought to address the two elephants in the room: federal student lending and the rising costs of college.

ADVERTISEMENT

The first — Of the $1.1 trillion in outstanding student debt, the federal government is responsible for over 85 percent. In addition, the Department of Education recently reported the three year default rate for federal loans is 13.4 percent. That is more than 2.5 times higher than the default rate for private student loans (5.33 percent), according to the CFPB’s July 2012 report.

The second — The cost of college has increased astronomically. President Obama, in his 2012 State of the Union address, highlighted the increase in student debt and called on colleges, universities and policymakers to look for ways to make college more affordable. The cost of college has risen 1,100 percent since 1980, according to the Bureau of Labor Statistics (BLS).

We look forward to working with the CFPB to assist students. Higher education is a crucial investment in our country’s future. College graduates are far more likely to secure a good job, build a career and contribute to economic activity. But it is imperative policymakers look at the full picture — the forest and the trees — as we seek solutions to help students build their own businesses, buy their own homes, and then one day send their own kids to college.